Socialist economics are the economics of socialism. According to many proponents, socialist economic theories and arrangements are united by the desire to: produce for use rather than profit (maximize use-value as opposed to exchange-value), achieve greater equality, give workers greater control of the means of production, utilize rational scientific planning to create a more effective mechanism for coordination production and distribution of goods and services, and to direct the economy towards social and societal economic goals. The term socialist economics may also be applied to analyses of the economics of existing socialist systems, such as the works of Hungarian economist János Kornai.[1]

Development of socialist economic thought

values of socialism have roots in pre-capitalist institutions such as the religious communes, reciprocal obligations, and communal charity of Mediaeval Europe, the development of its economic theory primarily reflects and responds to the monumental changes brought about by the dissolution of feudalism and the emergence of specifically capitalist social relations.[2] As such it is commonly regarded as a movement belonging to the modern era. Many socialists have considered their advocacy as the preservation and extension of the radical humanist ideas expressed in Enlightenment doctrine such as Jean-Jacques Rousseau's Discourse on Inequality, Wilhelm von Humboldt's Limits of State Action, or Immanuel Kant's insistent defense of the French Revolution.[3]

Capitalism appeared in mature form as a result of the problems raised when an industrial factory system requiring long-term investment and entailing corresponding risks was introduced into an internationalized commercial (mercantilist) framework. Historically speaking, the most pressing needs of this new system were an assured supply of the elements of industry – land, elaborate machinery, and labour – and these imperatives led to the commodification of these elements.[4] According to influential socialist economic historian Karl Polanyi's classic account, the forceful transformation of land, money and especially labour into commodities to be allocated by an autonomous market mechanism was an alien and inhuman rupture of the pre-existing social fabric. Marx had viewed the process in a similar light, referring to it as part of the process of "primitive accumulation" whereby enough initial capital is amassed to begin capitalist production. The dislocation that Polyani and others describe, triggered natural counter-movements in efforts to re-embed the economy in society. These counter-movements, that included, for example, the Luddite rebellions, are the incipient socialist movements. Over time such movements gave birth to or acquired an array of intellectual defenders who attempted to develop their ideas in theory.

As Polanyi noted, these counter-movements were mostly reactive and therefore not full-fledged socialist movements. Some demands went no further than a wish to mitigate the capitalist market's worst effects. Later, a full socialist program developed, arguing for systemic transformation. Its theorists believed that even if markets and private property could be tamed so as not to be excessively "exploitative", or crises could be effectively mitigated, capitalist social relations would remain significantly unjust and anti-democratic, suppressing universal human needs for fulfilling, empowering and creative work, diversity and solidarity.

Within this context socialism has undergone four periods: the first in the 19th century was a period of utopian visions (1780s-1850s); then occurred the rise of revolutionary socialist and Communist movements in the 19th century as the primary opposition to the rise of corporations and industrialization (1830–1916); the polarisation of socialism around the question of the Soviet Union, and adoption of socialist or social democratic policies in response (1916–1989); and the response of socialism in the neo-liberal era (1990- ). As socialism developed, so did the socialist system of economics.

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Utopian socialism

The first theories which came to hold the term "socialism" began to be formulated in the late 18th century, and were termed "socialism" early in the 19th century. The central beliefs of the socialism of this period rested on the exploitation of those who labored by those who owned capital or rented land and housing. The abject misery, poverty and disease to which laboring classes seemed destined was the inspiration for a series of schools of thought which argued that life under a class of masters, or "capitalists" as they were then becoming to be called, would consist of working classes being driven down to subsistence wages. (See Iron law of wages).

Socialist ideas found expression in utopian movements, which often formed agricultural communes aimed at being self-sufficient on the land. These included many religious movements, such as the Shakers in America.

Utopian socialism had little to offer in terms of a systematic theory of economic phenomena. In theory, economic problems were dissolved by a utopian society which had transcended material scarcity. In practice, small communities with a common spirit could sometimes resolve allocation problems.

Socialism and political economy

The first organized theories of socialist economics were significantly impacted by classical economic theory, including elements in Adam Smith, Robert Malthus and David Ricardo. In Smith there is a conception of a common good not provided by the market, a class analysis, a concern for the dehumanizing aspects of the factory system, and the concept of rent as being unproductive. Ricardo argued that the renting class was parasitic. This, and the possibility of a "general glut", an over accumulation of capital to produce goods for sale rather than for use, became the foundation of a rising critique of the concept that free markets with competition would be sufficient to prevent disastrous downturns in the economy, and whether the need for expansion would inevitably lead to war.

The first advocates of socialism promoted social leveling in order to create a meritocratic or technocratic society based upon individual talent. Count Henri de Saint-Simon was the first individual to coin the term "socialism".[6] Simon was fascinated by the enormous potential of science and technology, which led him to advocate a socialist society that would eliminate the disorderly aspects of capitalism and which would be based upon equal opportunities.[7] Simon advocated a society in which each person was ranked according to his or her capacities and rewarded according to his or her work.[6] This was accompanied by a desire to implement a rationally-organized economy based on planning and geared towards large-scale scientific and material progress, which embodied a desire for a semi-planned economy.[6]

Other early socialist thinkers were influenced by the classical economists. The Ricardian socialists, such as Thomas Hodgskin and Charles Hall, were based on the work of David Ricardo and reasoned that the equilibrium value of commodities approximated producer prices when those commodities were in elastic supply, and that these producer prices corresponded to the embodied labor. The Ricardian socialists viewed profit, interest and rent as deductions from this exchange-value.[8]

Das Kapital

Karl Marx employed systematic analysis in an ambitious attempt to elucidate capitalism's contradictory laws of motion, as well as to expose the specific mechanisms by which it exploits and alienates. He radically modified classical political economic theories. Notably, the labor theory of value that had been worked upon by Adam Smith and David Ricardo, was transformed into his characteristic "law of value" and used for the purpose of revealing how commodity fetishism obscures the reality of capitalist society.

His approach, which Engels would call "scientific socialism", would stand as the branching point in economic theory: in one direction went those who rejected the capitalist system as fundamentally anti-social, arguing that it could never be harnessed to effectively realize the fullest development of human potentialities wherein "the free development of each is the condition for the free development of all." [1].

Das Kapital is one of the many famous incomplete works of economic theory: Marx had planned four volumes, completed two, and left his collaborator Engels to complete the third. In many ways the work is modelled on Adam Smith's Wealth of Nations, seeking to be a comprehensive logical description of production, consumption and finance in relation to morality and the state.

It is a work of philosophy, anthropology and sociology as much as one of economics. However, it has several important statements:

The Law of Value Capitalist production is the production of “an immense multitude of commodities” or generalised commodity production. A commodity has two essential qualities firstly, they are useful, they satisfy some human want, “the nature of such wants, whether, for instance, they spring from the stomach or from fancy, makes no difference,” [2] and secondly they are sold on a market or exchanged. Critically the exchange value of a commodity “is independent of the amount of labour required to appropriate its useful qualities.” [3] But rather depends on the amount of socially necessary labour required to produce it. All commodities are sold at their value, so the origin of the capitalist profit is not in cheating or theft but in the fact that the cost of reproduction of labour power, or the worker's wage, is less than the value created during their time at work, enabling the capitalists to yield a surplus value or profit on their investments.

Historical Property Relations Historical capitalism represents a process of momentous social upheaval where rural masses were separated from the land and ownership of the means of production by force, deprivation, and legal manipulation, creating an urban proletariat based on the institution of wage-labour. Moreover, capitalist property relations aggravated the artificial separation between city and country, which is a key factor in accounting for the metabolic rift between human beings in capitalism and their natural environment, which is at the root of our current ecological dilemmas. [4]

Commodity Fetishism Marx adapted previous value-theory to show that in capitalism phenomena involved with the price system (markets, competition, supply and demand) constitute a powerful ideology that obscures the underlying social relations of capitalist society. "Commodity fetishism" refers to this distortion of appearance. The underlying social reality is one of economic exploitation.

Economic Exploitation Workers are the fundamental creative source of new value. Property relations affording the right of usufruct and despotic control of the workplace to capitalists are the devices by which the surplus value created by workers is appropriated by the capitalists.

Accumulation Inherent to capitalism is the incessant drive to accumulate as a response to the competitive forces acting upon all capitalists. In such a context the accumulated wealth which is the source of the capitalist's social power derives itself from being able to repeat the circuit of Money-->Commodity-->Money', where the capitalist receives an increment or "surplus value" higher than their initial investment, as rapidly and efficiently as possible. Moreover this driving imperative leads capitalism to its expansion on a worldwide scale.

Crises Marx identified natural and historically specific (i.e. structural) barriers to accumulation that were interrelated and interpenetrated one another in times of crises. Different types of crises, such as realization crises and overproduction crises, are expressions of capitalism's inability to constructively overcome such barriers. Moreover, the upshot of crises is increased centralization, the expropriation of the many capitalists by the few.

Centralization The interacting forces of competition, endemic crises, intensive and extensive expansion of the scale of production, and a growing interdependency with the state apparatus, all promote a strong developmental tendency towards the centralization of capital.

Material Development As a result of its constant drive to optimize profitability by increasing the productivity of labour, typically by revolutionizing technology and production techniques, capitalism develops so as to progressively reduce the objective need for work, suggesting the potential for a new era of creative forms of work and expanded scope for leisure.

Socialization, and the pre-conditions for Revolution By socializing the labour process, concentrating workers into urban settings in large scale production processes and linking them in a worldwide market, the agents of a potential revolutionary change are created. Thus Marx felt that in the course of its development capitalism was at the same time developing the preconditions for its own negation. However, although the objective conditions for change are generated by the capitalist system itself, the subjective conditions for social revolution can only come about through the apprehension of the objective circumstances by the agents themselves and the transformation of such understanding into an effective revolutionary program.[9]

After Marx

Marx's work sharpened the existing differences between the revolutionary and non-revolutionary socialists.

Non-revolutionary socialists took inspiration from the work of John Stuart Mill, and later Keynes and the Keynesians, who provided theoretical justification for (potentially very extensive) state involvement in an existing market economy. According to the Keynesians, if the business cycle could be solved by national ownership of key industries and state direction of their investment, class antagonism would be effectively tamed; a compact would be formed between labour and the capitalists. There would be no need for revolution; instead Keynes looked to the eventual "euthenasia of the rentier" sometime in the far future. Joan Robinson and Michael Kalecki employed Keynesian insights to form the basis of a critical post-keynesian economics that at times went well beyond liberal reformism. Many original socialist economic ideas would also emerge out of the trade union movement (see Guild Socialism).

In the wake of Marx, "Marxist" economists developed many different, sometimes contradictory tendencies. Some of these tendencies were based on internal disputes about the meaning of some of Marx's ideas, including the 'Law of Value' and his crisis theory. Other variations were elaborations that subsequent theorists made in light of real world developments. For example the monopoly capitalist school saw Paul A. Baran and Paul Sweezy attempt to modify Marx's theory of capitalist development, which was based upon the assumption of price competition, to reflect the evolution to a stage where both economy and state were subject to the dominating influence of giant corporations. World-systems analysis, would restate Marx's ideas about the worldwide division of labour and the drive to accumulate from the holistic perspective of capitalism's historical development as a global system. Accordingly, Immanuel Wallerstein, writing in 1979, maintained that "There are today no socialist systems in the world-economy any more than there are feudal systems because there is only one world-system. It is a world-economy and it is by definition capitalist in form. Socialism involves the creation of a new kind of world-system, neither a redistributive world-empire nor a capitalist world-economy but a socialist world-government. I don't see this projection as being in the least utopian but I also don't feel its institution is imminent. It will be the outcome of a long social struggle in forms that may be familiar and perhaps in very few forms, that will take place in all the areas of the world-economy."[10]

Meanwhile other notable strands of reformist and revolutionary socialist economics sprung up that were either only loosely associated with Marxism or wholly independent. Thorsten Veblen is widely credited as the founder of critical institutionalism. His idiosyncratic theorizing included acidic critiques of the inefficiency of capitalism, monopolies, advertising, and the utility of conspicuous consumption. Some institutionalists have addressed the incentive problems experienced by the Soviet Union. Critical institutionalists have worked on the specification of incentive-compatible institutions, usually based on forms of participatory democracy, as a resolution superior to allocation by an autonomous market mechanism. Another key socialist, closely related to Marx, Keynes, and Gramsci, was Piero Sraffa. He mined classical political economy, particularly Ricardo, in an attempt to erect a value theory that was at the same time an explanation of the normal distribution of prices in an economy, as well that of income and economic growth. A key finding was that the net product or surplus in the sphere of production was determined by the balance of bargaining power between workers and capitalists, which was in turn subject to the influence of non-economic, presumably social and political factors. The mutualist tradition associated with Proudhon also continued, influencing the development of libertarian socialism, anarchist communism, syndicalism and distributivism.

In the real world, revolutionary socialists were confronted by the necessity of running an economy, and generally a war economy, and developed ideas and practice in response to the situations they found themselves in.

Theory of Value

Socialists often hold the normative view that, within a socialist economic system, the value of a good or service should correspond to its physical utility, rather than its cost of production (labor theory of value) or its exchange value (Marginal Utility).[11]

Other socialists attempt to apply the labor theory of value to socialism, so that the price of a good or service is adjusted to equal the amount of labor time expended in its production. The labor-time would correspond to labor credits, which would be used as currency to acquire goods and services.

A mixed economy, where public and private ownership are mixed, and where industrial planning is ultimately subordinate to market allocation, the model generally adopted by social democrats e.g. in twentieth century Sweden.

Public Enterprise Employee Managed Market Economies, another form of market socialism in which publicly owned, employee-managed production units engage in free market exchange of goods and services with one another as well as with final consumers, e.g. mid twentieth century Yugoslavia, Two more theoretical models are Prabhat Ranjan Sarkar's Progressive Utilization Theory and Economic democracy.

Public Enterprise Participatory Planning, an economy featuring social ownership of the means of production with allocation based on an integration of decentralized democratic planning. An incipient historical forebear is that of Catalonia during the Spanish revolution. More developed theoretical models include those of Karl Polanyi, Participatory Economics and the negotiated coordination model of Pat Devine, as well as in Cornelius Castoriadis's pamphlet "Workers' Councils and the Economics of a Self-Managed Society"[13]

Socialist economies in practice

Although a number of economic systems have existed with various socialist attributes, or have been deemed socialist by their proponents, almost all of the economic systems listed below have largely retained various capitalist elements such as wage labor and commodity production. Nonetheless, various elements of a "pure socialist" economy have been implemented or experimented with in various economies throughout history.

Western Europe

Many of the industrialized, open countries of Western Europe experimented with one form of socialist development or another during the 20th century. They can be regarded as social democratic experiments, because they universally retained a wage-based economy and private ownership and control of the decisive means of production. Nevertheless, many western European countries tried to restructure their economies away from a pure capitalist model. Variations range from social democratic welfare states, such as in Sweden, to mixed economies where a major percentage of GDP comes from the state sector, such as in Norway, which ranks the highest in quality of life and equality of opportunity for its citizens.[14] Elements of these efforts persist throughout Europe, even if they have repealed some aspects of public control and ownership. They are typically characterized by:

Nationalization of key industries, such as coal, steel, power, and transportation. A common model was for a sector to be taken over by the state and then one or more publicly-owned corporations set up for its day-to-day running. Advantages of nationalization include: the ability of the state to direct investment in key industries, the distribution of state profits from nationalized industries for the overall national good, the ability to direct producers to social rather than market goals, greater control of the industries by and for the workers, and the benefits and burdens of publicly funded research and development are extended to the wider populace.

Redistribution of wealth, typically through progressive taxation.

Minimum wages, employment protection and trade union recognition rights for the benefit of workers. There were a number of different models of protection and trade union protection which evolved. Germany, for instance, appointed union representatives at high levels in all corporations and had much less industrial strife than the UK, whose laws encouraged strikes rather than negotiation. The objectives of these policies were to guarantee living wages and help produce full employment.

Union of Soviet Socialist Republics

The Soviet Union and some of its European satellites aimed for a fully centrally planned economy. They dispensed almost entirely with private ownership of capital. Workers were still, however, effectively paid a wage for their labour. Some believe that according to Marxist theory this should have been a step towards a genuine workers' state. However, some Marxists consider this a misunderstanding of Marx's views of historical materialism, and his views of the process of socialization.

The characteristics of this model of economy were:

Production quotas for every productive unit. A farm, mine or factory was judged on the basis of whether its production met the quota. It would be provided with a quota of the inputs it needed to start production, and then its quota of output would be taken away and given to downstream production units or distributed to consumers. Critics of both left and right persuasions have argued that the economy was plagued by incentive-related problems;[citation needed] claiming, for instance, that the system incentivized enterprise managers to underreport their unit's productive capacities so that their quotas would be easier to achieve, especially since the manager's bonuses were linked to the fulfillment of quotas.

Allocation through political control. In contrast with systems where prices determined allocation of resources, in the Soviet Union, allocation, particularly of means of production was determined by the bureaucracy. The prices that were constructed were done so after the formulation of the economy plan, and such prices did not factor into choices about what was produced and how it was produced in the first place.

Full employment. Every worker was ensured employment. However workers were generally not directed to jobs. The central planning administration adjusted relative wages rates to influence job choice in accordance with the outlines of the current plan.

Clearing goods by planning : if a surplus of a product was accumulated, then the central planning authority would either reduce the quota for its production or increase the quota for its use.

India

After gaining independence from Britain, India adopted a broadly socialist-inspired approach to economic growth. Like other countries with a democratic transition to a mixed economy, it did not abolish private property in capital. India proceeded by nationalizing various large privately-run firms, creating state-owned enterprises and redistributing income through progressive taxation in a manner similar to social democratic Western European nations than to planned economies such as the USSR or China. It did however adopt a very firm focus on national planning with a series of broad Five-Year Plans.

People's Republic of China

China embraced a wholehearted socialist model after the Communist victory in its Civil War. Private property and private ownership of capital were abolished, and various forms of wealth made subject to state control or to workers' councils.

The Chinese economy broadly adopted a similar system of production quotas and full employment by fiat to the Russian model. The Great Leap Forward saw a remarkable large-scale experiment with rapid collectivistaion af agriculture, and other ambitious goals. Results were less than expected, (e.g., there were food shortages) and the program was abandoned after one to three years.

In recent decades China has opened its economy to foreign investment and to market-based trade, and has continued to experience strong economic growth. It has carefully managed the transition from a planned socialist economy to a market economy, officially referred to as the socialist market economy, which has been likened to capitalism by some outside observers[15]. As a result, centralized economic planning has little relevance in China today.

The current Chinese economic system is characterized by state ownership combined with a strong private sector that privately owned enterprises that generate about 33%[16] (People's Daily Online 2005) to over 50% of GDP in 2005[17], with a BusinessWeek article estimating 70%[18] of GDP, a figure that might be even greater considering the Chengbao system. Some western observers note that the private sector is likely underestimated by state officials in calculation of GDP due to its propensity to ignore small private enterprises that are not registered.[19] Most of the state and private sectors of economy are governed by free market practices, including a stock exchange for trading equity. The free-market is the arbitrator for most economic activity, which is left to the management of both state and private firms. A significant amount of privately-owned firms exist, especially in the consumer service sector.[20]

The state sector is concentrated in the 'commanding heights' of the economy with a growing private sector engaged primarily in commodity production and light industry. Centralized directive planning based on mandatory output requirements and production quotas has been superseded by the free-market mechanism for most of the economy and directive planning is utilized in some large state industries.[21] A major difference from the old planned economy is the privatization of state institutions. 150 state-owned enterprises remain and report directly to the central government, most having a number of subsidiaries.[22] By 2008, these state-owned corporations have became increasingly dynamic largely contributing to the increase in revenue for the state[23][24]. The state-sector led the economic recovery process and increased economic growth in 2009 after the financial crises.[25] This type of economic system is defended from a Marxist perspective which states that a socialist planned economy can only be possible after first establishing the necessary comprehensive commodity market economy, letting it fully develop until it exhausts its historical stage and gradually transforms itself into a planned economy.[26] Proponents of this model distinguish themselves from market socialists who believe that economic planning is unattainable, undesirable or ineffective at distributing goods, viewing the market as the solution rather than a temporary phase in development of a socialist planned economy.

Socialist Federal Republic of Yugoslavia

Yugoslavia pursued a socialist economy based on autogestion or worker-self management. Rather than implementing a centrally-planned economy, Yugoslavia developed a market socialist system where enterprises and firms were socially owned rather than publicly-owned by the state. In these organizations, the management was elected by directly by the workers in each firm, and were later organized according to Edvard Kardelj's theory of associated labor.

Singapore

Singapore pursued a state-led model of economic development under the People's Action Party, which initially adopted a Leninist approach to politics and a broad socialist model of economic development[28]. The PAP was initially a member of the Socialist International. Singapore's economy is dominated by state-owned enterprises and government-linked companies through Temasek Holdings, which generate 60% of Singapore's GDP.[29] The state also provides substantial public housing, free education, health and recreational services, as well as comprehensive public transportation.[30] Today Singapore is often characterized as having a state capitalist economy that combines economic planning with the free-market[31]. While government-linked companies generate a majority of Singapore's GDP, moderate state planning in the economy has been reduced in recent decades.

Criticism of socialist economics

Opponents of socialist economics criticize it for eliminating the free market and its price signals, and for its inability to rationally calculate (the economic calculation problem). Critics of socialism argue that it results in reduced prosperity, lacks incentives for workers and slows technological advances. Criticism of socialist economics comes from neoclassical and classical economists, Austrian school economists and some anarchist economists. Various socialist economic theories are criticized by other schools of socialist thought. Libertarian socialist mutualist and market socialist economists, for example, criticize centralized economic planning and propose participatory economics.

Austrian school economists, such as Friedrich Hayek and Ludwig Von Mises, have argued that the denial of private ownership of the means of production — as nearly all models of socialist economics promote — would inevitably create worse economic conditions for the general populace than those that would be found in market economies. They argue that without the price signals of the market, it is impossible to calculate rationally how to allocate resources. Mises has called socialism "economic insanity". Polish economist Oskar Lange and Abba Lerner attempted to rebut Mises' argument by developing the Lange Model during the Economic calculation debate. The Lange model states that an economy in which all production is performed by the state, where there is a functioning price mechanism, has similar properties to a market economy under perfect competition, in that it achieves Pareto efficiency.

The neoclassical view is that there is a lack of incentive, not a lack of information in a planned economy. They argue that within a socialist planned economy there is a lack of incentive to act on information. Therefore, the crucial missing element is not so much information as the Austrian school argued, as it is the motivation to act on information.[32]

In his work, Socialism, Ludwig Von Mises criticized socialism for its inability to calculate rationally:

To suppose a socialist community could subsitute calculation in kind for calculation in terms of money is an illusion. In a community that does not practice exchange, calculations in kind can never cover more than consumption goods. They break down entirely once goods of higher order are concerned. Every step that moves away from private ownership of the means of production is a step away from rational economic calculation[33]

Von Mises also pointed out socialism's tendency to consume capital, whose accumulation is the source of economic progress:

In fact, socialism is not in the least what it pretends to be. It is not the pioneer of a better world, but the spoiler of what thousands of years of civilization has created. It does not build; it destroys. Destruction is the essence of it. It produces nothing, and only consumes what the private ownership of the means of production has created. Since a socialist order of society cannot exist, unless it be a fragment of socialism within an economic order resting otherwise on private property, each step leading towards socialism must exhaust itselfin the destruction of what already exists.[34]

In conclusion, Von Mises warned his audience against the consequences of socialist economics.

If the intellectual dominance of socialism remains unshaken, then in a short time the whole cooperative system that Europe has built up for thousands of years will be shattered. For a socialist order of society is unrealizable. All efforts to realize socialism leads only to the destruction of society. Factories, mines, and railways will come to a standstill, while towns become deserted. The population of the industrial societies will die out or migrate elsewhere. The farmer will return to the self-sufficiency of the closed, domestic economy. Without private ownership of the means of production there is, in the long run, no production other than hand-to-mouth production for one's needs.[35]

References

^ Kornai, János: The Socialist System. The Political Economy of Communism. Princeton: Princeton University Press and Oxford: Oxford University Press 1992; Kornai, Janos: Economics of Shortage. Munich: Elsevier 1980. A concise summary of Kornai's analysis can be found in Verdery, Katherine: Anthropology of Socialist Societies. In: International Encyclopedia of the Social and Behavioral Sciences, ed. Neil Smelser and Paul B. Baltes. Amsterdam: Pergamon Press 2002, available for download here.